NIESR upgrades UK growth prospects this year by 0.3% to 1.2%

2nd August 2013

The National Institute of Economic and Social Research says the UK economy will grow by 1.2% this year and 1.8% next year. This is an upgrade of 0.3 per cent on both figures.

The Institute says households have cut savings with the savings ratio from 6.7% last year to 4.2% this year. It says this should drive consumer spending at the expense of household saving. The think tank warns that growth could collapse next year to 1% if the saving rate increases to just 5.4%.

It says: “One potential risk is that these low savings rates are not sustained. In any case, while consumer spending growth is necessary, a balanced recovery will require a significant contribution from next trade and business investment. We see relatively little sign of this as yet.”

The think tank says that the world economy will grow by 3.1 per cent this year, and by 3.6 per cent in 2014: still below longer-term trend, and revised down since May.

“Global growth prospects for this year and next have weakened slightly since early May. This is partly due to further signs of a significant slowing in a number of key emerging market economies, particularly China. But activity has also been somewhat weaker than assumed in some advanced economies, including the United States.

“The modest improvement of global growth projected for next year is expected to be supported by the maintenance of highly accommodative monetary policies in key advanced economies, by the fiscal stimulus being implemented in Japan, and by the waning of fiscal drag in the United States and the Euro Area. In Japan, while there is need for early announcement of a concrete, credible plan for medium-term fiscal consolidation, the consumption tax increases planned for 2014-15 might appropriately be phased in more gradually than provisionally scheduled, to limit the risk of weakening the recovery. The decision by the ECOFIN Council to allow more time for some European countries to reduce their fiscal deficits shows some welcome pragmatism.”